On Our Radar

On Our Radar

Here's Why This Election Will Be Historic for Marijuana

In just two days approximately 219 million registered voters across our country will be heading to the polls to decide who'll become the 45th president of the United States. Regardless of who they choose to lead our great country, the decision will be historic.

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However, Nov. 8 is a critical day for the marijuana industry, too, with residents in nine states voting on whether to legalize marijuana either medically or recreationally. President Obama has previously stated that the best way to get the attention of Congress is to continue passing legal cannabis laws at the state level, and that's exactly what residents in a number of states will have an opportunity to do on Tuesday.

On Election Day, five states -- California, Nevada, Maine, Massachusetts, and Arizona -- will be voting on a recreational marijuana initiative, whereas four states -- Florida, North Dakota, Arkansas, and Montana -- are voting on a medical marijuana initiative or amendment.

Why this election is so historic for marijuana

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This particular election will be historic for the marijuana industry for three reasons.

First, we're about to witness more states voting on marijuana than ever before. Remember, up until recently, cannabis was still considered to be a taboo topic. Only during this election cycle have the presidential candidates been willing to recognize pot as a viable issue that some Americans care about. Though both presidential candidates have teetered toward the wait-and-see approach for recreational marijuana, Hillary Clinton and Donald Trump have favored the idea of legalizing medical cannabis at the federal level.

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Second, we could see an official tipping point for legal medical cannabis states. At the moment, exactly half of all U.S. states have legalized medical pot. But after the election, we could be looking at residents in more than half of all U.S. states having legal access to marijuana for varying ailments (cancer, glaucoma, and epilepsy are among the most common from state to state). This really shouldn't be too surprising, with a CBS News poll in 2015 showing that a whopping 84% of survey takers favored the idea of legalizing medical marijuana on a national level. In Florida, where the medical marijuana amendment requires 60% approval to pass, eight survey since 2015 have all ended with medical legalization support in excess of 60%.

Finally, the marijuana industry has an opportunity to snag the whale, California. California by itself has the eighth-largest gross domestic product in the world, meaning that if the marijuana industry can succeed there, it'll prove to lawmakers on Capitol Hill that it can probably succeed anywhere within the United States. When fully ramped up, recreational marijuana could bring in approximately $1 billion in tax revenue for California. By comparison, Colorado is leading the charge as an individual state, and it collected around $135 million in combined tax and licensing revenue in 2015. California is the 800-pound gorilla for the marijuana industry, and Prop 64 looks to have a good shot of gaining approval come Election Day.

Don't fall for this trap

Based on the latest polls, more states than not of the nine voting on Nov. 8 look poised to legalize marijuana either recreationally or medically. That's great news for the cannabis industry and the 60% of Americans who support the nationwide legalization of the drug in Gallup's latest poll.

However, we've witnessed a similar story play out before and it proved mostly disastrous for investors. In 2014, shortly after Oregon and Alaska each passed recreational marijuana initiatives, marijuana stocks shot through the roof only to completely deflate a short time later. It's not uncommon for emotions to run high around election time, but it's important for level-headed investors to understand that the odds are stacked against a marijuana investment succeeding.

Image source: Getty Images.

To begin with, there are a number of inherent disadvantages pot companies are forced to contend with. Come tax time, for example, cannabis-based businesses are disallowed from taking normal business deductions. Having to pay tax on their gross profits rather than net profits put them at a disadvantage when it comes to expansion and hiring opportunities.

Along those same lines, cannabis businesses have a genuinely difficult time finding a financial institution that'll work with them. Only around 3% of the nation's 6,700 financial institutions are offering basic banking services, such as a checking account or line of credit, to pot businesses. Being forced to deal with cash means increased security risks for these businesses, as well as reduced expansion opportunities.

Beyond this, most marijuana stocks aren't listed on reputable exchanges like the NYSE or Nasdaq, meaning it can be difficult to get up-to-date balance sheet information, and nearly all pot stocks are losing money with little sign of profitability in the future.

Investors need big corporations to enter the marijuana industry in order for it to become a viable investment opportunity, because big corporations likely have the pocketbooks to withstand the higher regulatory costs associated with running a pot business. However, as long as the drug remains as schedule 1 (i.e., illicit) at the federal level, the opportunity for small businesses to thrive and thwart the entrance of big business will likely weigh on any shot investors have of making money during the current marijuana boom.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.